What do New Tax Proposals Mean for Stocks in 2021?

By: Andrew McShane

Many investors are asking the same question. Now that Democrats control congress, what do Biden’s tax proposals mean for the stock market?

Well, so far the market has essentially shrugged off any pending tax implications as the S&P 500 has gained over 15% this year to reach 3800 for the first time ever. If the strong out-of-the-gate performance isn’t enough to bolster confidence in the market, Goldman Sachs has predicted the S&P 500 will grown 14% in 2021 to 4,300 points. Goldman Sachs economists predict that Earnings Per Share (EPS), while falling 1% in 2020, will grow by 31% in 2021.

So, with all of this optimism in the market right now, why do we have all of the hand wringing from some investors about potential tax implications?

It’s understandable that they would be wary. Democrats have a history of heavy handed regulation and taxing high-income earners.

However, this time around, it may be a little different.

The Tax Proposals and Implications

To start, let’s break down some of the proposed tax implications.

  • Biden has said he will not raise taxes on Americans earning less than $400,000 per year

He has proposed:

  • raising the marginal income tax rate from 37% to 39.6% for those making more than $400,000
  • raising corporate taxes from 21% to 28%
  • taxing long-term capital gains and qualified dividends at a tax rate of 39.6% on income above $1million

Based on the proposal, individual tax rates do not seem to be the primary focus. Rather, corporate tax rate and long-term capital gains tax appear to be the most affected by the proposal. And these rate hikes could have impacts on dividend stocks and stocks that have provide high capital gains.

So, now the question is, “When will these tax proposals be implemented and what will be the true impact for the retail investor?”

It is very unlikely that we will see any form of tax hikes in 2021. In fact, President-elect Biden has just proposed $2 Trillion in extra, fiscal spending to help the U.S. economy get through the coronavirus pandemic. It would be counter-intuitive to put such a heavy emphasis on stimulus and then turn around and raise taxes. We have also seen Janet Yellen, the new Secretary of the Treasury, convey an investment-first mentality when it comes to the U.S. economy and has recently been in favor of keeping rates low.

Your Action as an Investor

Every sign is that 2021 will be a great year for the market. Obviously, unforeseen factors can have implications on the stock market. But with a new vaccine, people are expected to get back to work, travel on vacations, and go to restaurants. Combined with government-backed stimulus, the economy will get humming again and stocks should continue to see great growth throughout 2021.

Even if there are tax hikes on capital gains and corporations, selling your stocks would be a fool-hardy, rash decision. The market has been on a tear for over a decade and minimal tax hikes would not outweigh the potential to create generational wealth in the stock market.

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